1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION
2 450 N STREET
3 SACRAMENTO, CALIFORNIA
4
5
6
7
8 REPORTER'S TRANSCRIPT
9 JANUARY 15, 2013
10
11 SALES AND USE TAX APPEAL HEARING
12 APPEAL OF
13 SONJA M. CRAIGHTON
14 NO. 558975 (KH)
15 AGAINST PROPOSED ASSESSMENT OF
16 SALES AND USE TAX
17
18
19
20
21
22
23
24
25 Reported by: Kathleen Skidgel
26 CSR No. 9039
27 Juli Price Jackson
28 CSR No. 5214
1
1 P R E S E N T
2 For the Board Jerome E. Horton
of Equalization: Chairman
3
4 Michelle Steel
Vice-Chairwoman
5
6 Betty T. Yee
Member
7
8 George Runner
Member
9
10 Marcy Jo Mandel
Appearing for John
11 Chiang, State Controller
(per Government Code
12 Section 7.9)
13
Joann Richmond
14 Chief
Board Proceedings Division
15
16 For Board of Deborah Cumins
Equalization Staff: Business Taxes Specialist III
17
18 For the Department: Marc Alviso
Business Taxes Specialist II
19
20 Kevin Hanks
Chief, Headquarters
21 Operations Division
22 Stephen Smith
Tax Counsel IV
23
24 For Petitioner: Sonja M. Craighton
Taxpayer
25
26 ---oOo---
27
28
2
1 450 N STREET
2 SACRAMENTO, CALIFORNIA
3 JANUARY 15, 2013
4 ---oOo---
5 MR. HORTON: Ms. Richmond, what is our next
6 item?
7 MS. RICHMOND: Good afternoon, Members. Our
8 next item is C3, Sonja M. Craighton.
9 Please come forward.
10 MR. HORTON: As she comes, would Ms. Cumins
11 please introduce the issues in this case?
12 MS. Cumins: Good afternoon, Chairman Horton
13 and Members. Deborah Cumins for the Appeals Division.
14 The issues in this petition of Sonja Craighton
15 are the amount of unreported taxable sales and the
16 negligence penalty.
17 MR. HORTON: Welcome, Ms. Craighton.
18 MS. CRAIGHTON: Thank you.
19 MR. HORTON: Um, I notice that you didn't bring
20 the grandkids.
21 MS. CRAIGHTON: I have one hour and 15
22 minutes.
23 MR. HORTON: Okay.
24 Ma'am, you have ten minutes -- I understand
25 why.
26 You have ten minutes to make your presentation.
27 We'd ask that you commence with your introduction for
28 the record.
3
1 We'll go to the Department. The Department
2 will have ten minutes as well, and then we'll return and
3 allow you five minutes on rebuttal.
4 MS. CRAIGHTON: Thank you.
5 My name is Sonja Craighton. And I just wanted
6 to bring up a few things that I don't, uh, think the BOE
7 looked at or took into consideration or simply didn't
8 understand.
9 I don't know what other MetroPCS stores do
10 because we're all independent dealers. And I was
11 grouped into this group, and it just doesn't seem
12 correct.
13 We sell -- we sold our items, um, at a loss.
14 We would get our commission based on the plan that we
15 sold to the customer. So if we were able to sell a
16 customer a phone, that cost $50, for $20, we would
17 receive $50 for signing that customer up on the $50
18 sales plan.
19 Therefore, resulting only in a $20 profit, plus
20 two to five dollars commission for paying their bill,
21 resulting in a total profit of only $22 at that time of
22 purchase.
23 That customer would then come back in and pay
24 their bill every month and we would receive two to five
25 dollars every month.
26 If that customer was there paying a bill, they
27 might buy a car charger or memory card, resulting in
28 more of a profit from that initial sale, or they would
4
1 load on their prepaid Visa cards that we sold where we
2 would have a $9.95 credit back to us.
3 Payments that were processed through Qpay,
4 MetroPCS and PreCash, I was just simply a middleman
5 collecting the money from the customers.
6 Qpay would collect the money for their monthly
7 phone bills and then debit our business account two days
8 afterwards. But we would first collect the money from
9 the customers.
10 MetroPCS was the same way for the payments
11 received at the start of the service.
12 And PreCash was the same for the credit cards
13 that we offered.
14 These customers simply would use our service,
15 debiting our account, leaving the money in our account,
16 usually two to three days. We would only be paid one to
17 $15, um, on these transactions. We would not keep the
18 payment money. It was just simply forwarded on.
19 The BOE has a figure of 749,000 in sales. Our
20 tax on Form 1040 shows 627. Our taxes were prepared by
21 a professional CPA/Bookkeeper/Tax Preparer.
22 The total sales of 627,000 includes the
23 payments made to us by the customers that was then
24 debited from our account to the corresponding companies:
25 Qpay, TeleTracker, MetroPCS and PreCash.
26 There was a button on our Point of Sale that we
27 just hit at the end and it told us what all the taxes
28 amount was for everything that was sold and would
5
1 itemize the items.
2 The BOE did not allow for inventory adjustments
3 in any of their figures, meaning that every time we --
4 that was bought -- everything that we bought for the
5 prior 30 months, when in fact there were returns and,
6 um, charitable contributions that we made.
7 Again, our income tax was repaired -- prepared
8 by a CPA. Alan signed them and I signed them myself.
9 Thank you.
10 MR. HORTON: Thank you.
11 We'll now go to the Department. The Department
12 has ten minutes -- bless you -- to make your --
13 MR. HANKS: Excuse me.
14 MR. HORTON: My apologies on that. It's just
15 automatic.
16 Ten minutes to make your presentation. We
17 would ask that you commence with your introduction for
18 the record.
19 MR. ALVISO: Uh, good afternoon, Chairman
20 Horton and Members.
21 My name is Marc Alviso. I will be representing
22 the Sales and Use Tax Department. To my right is
23 Mr. Kevin Hanks, also from the Sales and Use Tax
24 Department. And to Mr. Hanks' right is Mr. Stephen
25 Smith from the Legal Department.
26 Excuse me -- as was mentioned, the taxpayer
27 operated a MetroPCS store that sold phones unbundled, as
28 well as accessories. Unbundled phones are those that do
6
1 not require the taxpayer -- or, excuse me, the customer
2 to contract with service for the phone.
3 Beginning in July of 2010, while the business
4 was still open and operating, district staff had
5 contacted the taxpayer on several occasions to obtain
6 business records. No records were initially provided.
7 The auditor commenced and prepared an FBO work
8 paper and provided that to the taxpayer in late
9 September 2010, after which, uh, some documents were
10 received. Those documents included federal income tax
11 returns for 2007 through 2009, a sales summary report
12 from the taxpayer's Point of Sale or POS system, a
13 purchase summary, which appears to be for phone
14 accessories only, as well as monthly Qpay reports for
15 the period of January 2009 through June 2010.
16 Um, my understanding in looking at the Qpay and
17 looking at the file was that the Qpay report showed
18 payments that the taxpayer was accepting on behalf of
19 MetroPCS, and they were then earning a small fee, um,
20 based on the payments that they accepted and forwarded
21 on to MetroPCS.
22 No source documents, such as sales or purchase
23 invoices, were provided, with the exception of two sales
24 invoices with associated purchase invoices which were
25 provided after the appeals conference.
26 The taxpayer also provided copies of dealer
27 agreements that they had established with MetroPCS.
28 And, again, those were also provided after the appeals
7
1 conference.
2 In reviewing the records that were provided,
3 sales -- total sales recorded on the Point of Sale
4 Summary Report were actually less than the sales
5 reported on the sales and use tax returns.
6 Additionally, gross receipts that were reported
7 on the federal income tax returns significantly exceeded
8 those that were reported on the sales and use tax
9 returns. Um, for example, in 2008, the gross receipts
10 on the federal income tax returns were $130,000 higher
11 than what was on the sales and use tax returns. And in
12 2009, it was approximately 250,000 higher on the gross
13 receipts reported on the federal income tax returns.
14 Further, cost of goods sold on the federal
15 income tax returns also significantly exceeded sales
16 reported on the sales and use tax returns.
17 The gross receipts and the purchases that were
18 reported on the federal income tax returns were compared
19 and book markups were computed. Those were computed at
20 2.23 percent for 2008 and 43.7 percent for 2009, for an
21 overall average of just under 25 percent for the two
22 years combined.
23 The district considered the bookups -- bookup
24 markups -- excuse me, book markups too low based on
25 prior audit experience with other MetroPCS dealers in
26 the area. Consequently, the gross receipts reported on
27 the federal income tax returns were not accepted as they
28 appeared to be understated.
8
1 A shelf test could not be performed of the
2 taxpayer's sales because sales invoices and purchase
3 invoices had not been provided with the exception of the
4 two that were provided after the appeals conference.
5 The dealer -- or, excuse me, the Department
6 estimated the taxpayer's markup to be approximately 50
7 percent of the cost of the purchases. This percentage
8 was determined based on several other audits and FBOs
9 that had been performed on other Metro PCS dealers in
10 the Sacramento area during the same general time period.
11 Merchandise purchases reported on the federal
12 income tax returns for 2008 and 2009 were marked up by
13 50 percent. And then afterwards, they also used those
14 amounts to estimate sales that had occurred in the
15 fourth quarter 2007 as well as the first two quarters of
16 2010.
17 With this approach, total audited taxable sales
18 were just under 750,000 were computed, and those were
19 compared to the reported taxable sales during the period
20 of just under 77,000. This led to unreported taxable
21 sales at $672,721 which represents an error ratio of 876
22 percent.
23 The taxpayer indicates that the gross receipts
24 reported on the federal income tax returns were greater
25 than the sales reported on the sales and use tax returns
26 because commissions received from MetroPCS, uh -- in
27 reviewing copies of the agreements that they had
28 provided with MetroPCS, it did not appear that there
9
1 were any specific provisions that identified amounts or
2 commissions earned from their sales.
3 Excuse me. Included in those contracts were
4 also list of approved wireless devices or phones, uh,
5 available on the MetroPCS network. Um, the two
6 different contracts that were provided also listed the
7 purchase price for the phone as well as the suggested
8 retail price. And those were also higher than the cost
9 as well.
10 The -- as I mentioned earlier, after the
11 appeals conference, the taxpayer had provided two sales
12 invoices for phones and two purchase invoices for
13 phones, and the -- to correspond with the -- the claim
14 that the phones were sold for less than the cost of the
15 phones themselves.
16 In reviewing those sales invoices, um, I
17 noticed that no ESN or serial number was listed on the
18 sales invoices. So it's unclear if that was actually a
19 sale of the phone. And I also noted that the product
20 code stated on the sales invoices also corresponded with
21 product codes in the taxpayer's records that indicated
22 sales of phone accessories, specifically travel
23 chargers.
24 Additionally, on one set of sales invoices with
25 the accompanying purchase invoice, the date of the sale
26 was actually prior to the date the purchase of the phone
27 was made.
28 Excuse me.
10
1 Based on the, um, audits of the other MetroPCS
2 dealers that I had mentioned, dealers did not appear to
3 sell phones at below cost. The average overall markup
4 for the dealers was slightly more than 50 percent,
5 specifically 52.555 percent. And that was based on 12
6 different dealers, again, in the Sacramento area, during
7 the same time period.
8 Uh, given the competitive nature of the
9 wireless phone business, it seems unlikely the taxpayer
10 would be selling phones for substantially below cost.
11 Based on the computations of what was reported, it would
12 equate to approximately 20 percent -- they were selling
13 the phones at approximately 20 percent of the price that
14 they paid for them. Um, this compares to other dealers
15 selling the phones for 50 percent -- 52 percent over the
16 cost that they were purchased for.
17 In addition, included with the Notice of
18 Determination was the ten percent negligence penalty.
19 Revenue and Taxation Code 6484 provides that a
20 ten-percent penalty can be included in the determination
21 when there is negligence or intentional disregard.
22 Negligence is a failure to act with due care and to do
23 what a reasonably prudent person would do under the same
24 or similar circumstances.
25 Negligence is imposed in this case because the
26 taxpayer failed to maintain records sufficient for sales
27 and use tax purposes and substantially underreported the
28 taxes due.
11
1 Reported taxable sales were substantially
2 understated with an overall percentage of error of 876
3 percent. Total audited sales were 749,514, compared to
4 reported taxable sales of 76,793.
5 What this means is essentially the taxpayer had
6 reported slightly more than $1 in taxable sales for
7 every $10 in taxable sales that were made.
8 Although this is the taxpayer's first audit, we
9 believe that the penalty was properly assessed due to
10 the high percentage of error and the lack of
11 records maintained by the taxpayer.
12 In closing, we agree with the recommendation
13 contained in the Appeals Division's Decision and
14 Recommendation and recommend the petition be denied.
15 MR. HORTON: On rebuttal.
16 MS. CRAIGHTON: I don't, um -- I did not -- I
17 don't know what he referred to as book markup, but I did
18 not mark up my phones. I was selling service on the
19 phones, and that's that I was paid the most commission
20 on. And that's why I sold the phones that way.
21 There was -- all the required documentations
22 were sent over by courier in two accordion files. He
23 did acknowledge that they received a courier, but they
24 don't have all the paperwork.
25 Everything was done on a POS and, um, I am no
26 longer selling phones. Metro wants to sell the phones
27 for the suggested retail price and up, and I wouldn't do
28 that. So I'm no longer able to sell them because I was
12
1 selling the service, not the phones. And I maintain
2 that.
3 I was not, uh, doing what the other dealers
4 were doing with the markup. I was making my money off
5 of selling the service.
6 Thank you.
7 MR. HORTON: Thank you.
8 Discussion, Members?
9 MS. STEEL: Question.
10 MR. HORTON: Member Steel.
11 MS. STEEL: You said you were getting
12 commissions every time you sell the phones. That's why
13 you sold the phones under the, um -- the price suggested
14 by the dealer.
15 MS. CRAIGHTON: Correct. Whatever plan they
16 purchased, that was how much we were paid.
17 MS. STEEL: Right.
18 MS. CRAIGHTON: Anywhere from $40 to $80.
19 MS. STEEL: Your tax return didn't include -- I
20 mean, didn't divide it that, you know, how much
21 merchandise was sold and how much commission you got.
22 So, um, on the tax return, how -- how much was
23 exactly that -- you know, when, uh, if you reported
24 right way, then how much commission -- what was the
25 percentage of the total income there, for the
26 commission?
27 MS. CRAIGHTON: It was every single day,
28 whatever -- whatever day you sold that plan, it would go
13
1 into the one account and they would take it out in two
2 days; whatever the customer purchased.
3 MS. STEEL: Right.
4 Um, to the Department that, you know, those tax
5 returns that -- did we, uh, deducted the commission
6 side? Because there is just no taxable on the
7 commission, that what she received, right?
8 MR. ALVISO: The -- the audit was actually
9 based on a markup of purchases reported.
10 MS. STEEL: But you cannot really do the markup
11 because she just told us that, uh, markup was very low
12 or she was losing money because she was getting the
13 commission.
14 So you cannot really compare with the other
15 companies that, you know, how much average markup that
16 the other companies were -- were getting.
17 MR. ALVISO: We had, um, no documentation as to
18 actually how gross receipts was computed that was
19 reported on the federal income tax returns. We don't
20 know what that was exactly comprised of, if it -- or
21 what percentage was commissions or other income other
22 than sales. Um, and to my knowledge that hasn't been
23 provided.
24 MS. STEEL: Do you have those informations?
25 MS. CRAIGHTON: The income tax?
26 MS. STEEL: No. How much was the commission
27 and how much you really sold the, uh, merchandise,
28 telephones?
14
1 MS. CRAIGHTON: I have given that to them in
2 the first, uh -- the file that we had given, I guess,
3 apparently is missing.
4 Everything is available on the POS. Some of it
5 I can get into, others I'm locked out of.
6 MS. STEEL: Okay.
7 MR. ALVISO: And just -- and just to add, the
8 only thing that we had in the files, um, regarding
9 commissions were the Qpay reports. And those covered a
10 period of 18 months, 2009 --
11 MS. STEEL: Right.
12 MR. ALVISO: -- and the first six months of
13 2010. And based on that, it appeared there were
14 transact -- total transactions each month occurring of
15 approximately 45 to $50,000, of which it appears that
16 the taxpayer was retaining approximately 2200 to 2500
17 per month was being left in the taxpayer's account.
18 MS. STEEL: Commission out of that part.
19 MR. ALVISO: Um, yes, out of that part. So it
20 was roughly about five percent.
21 Um, if you were to compute, um -- if those
22 commissions or those amounts obtained and forwarded on
23 to Qpay at 45,000 to 50,000 per month, over the course
24 of a year, that would be approximately 500,000 or more.
25 However, the gross sales that were reported on the
26 federal income tax returns were much less than that
27 amount. So it didn't appear that actually all monies
28 that were going through Qpay were being included in
15
1 gross receipts because it was even --
2 MS. STEEL: So what you are saying is this
3 taxpayer didn't report the commission part, even the
4 total tax reported; is that what you are saying?
5 MR. ALVISO: The -- based on the Qpay reports,
6 the total transaction going through Qpay actually
7 exceeded the gross receipts that were reported on the
8 corresponding federal income tax returns. So it didn't
9 appear that gross receipts had included those amounts.
10 MS. STEEL: Could you explain that?
11 MS. CRAIGHTON: I'm not sure what he's saying.
12 I know that, uh, the CPA would take our monthly POA,
13 everything that was on there. He would break it down by
14 TeleTracker, Qpay, MetroPCS and PreCash.
15 I have my bank statements that he looked at.
16 MS. STEEL: How did you get those, um -- the
17 amount of -- for total sales and commission that -- you
18 know what, before that. That, uh, total taxable measure
19 here, did we include those commissions?
20 MR. ALVISO: Uh, the total taxable sales do not
21 include the commissions. The audited sales were
22 determined by looking at the purchases stated on the
23 federal income tax returns for both 2008 and 2009.
24 MS. STEEL: Right. But you cannot really
25 figure out what the markups because, you know --
26 MR. ALVISO: We -- we -- we were not provided
27 with any documentation from the taxpayer of the
28 operations that we could perform a test.
16
1 MS. STEEL: So you just assume, then you just
2 put the average industry.
3 MR. ALVISO: Correct.
4 MS. STEEL: Industry average amount.
5 Okay. Um, but this taxpayer said she was
6 selling under, you know, the price of what she was
7 getting it.
8 MR. ALVISO: Correct.
9 MS. STEEL: Because of the commission.
10 MR. ALVISO: Although we don't have any
11 documentation to, uh -- to confirm that that was in fact
12 the case.
13 MS. STEEL: She say you have all the documents
14 here.
15 MR. ALVISO: Uh, we do have documents. We have
16 federal income tax returns. We have a sales summary.
17 And the total sales, actually, on that summary report --
18 MS. STEEL: Right.
19 MR. ALVISO: -- actually is less than what was
20 reported on the sales and use tax return. So it didn't
21 seem to include all their sales.
22 We have a Qpay report which was for an 18-month
23 period.
24 And then we have a purchase summary for the FBO
25 period. The total purchases on that only totaled
26 approximately 11 to $12,000. And there were no phone or
27 other wireless devices listed on that purchase summary,
28 only purchases of accessories, such as chargers and
17
1 cases.
2 Um, I also -- after speaking to the taxpayer
3 this morning, I wanted to confirm that we had all the
4 documents that had been provided. So I contacted the
5 appeals conference holder, as well as the auditor in the
6 district, and confirmed that all the documents had --
7 that they had provided were considered and were
8 reviewed. And there was nothing that had been
9 previously provided that was not necessarily -- that had
10 not been reviewed.
11 MS. STEEL: So there's no additional documents
12 that --
13 MR. ALVISO: Based on what the, uh --
14 MS. STEEL: -- the taxpayer provided.
15 MR. ALVISO: -- appeals conference holder and
16 the auditor informed me.
17 MS. STEEL: Okay.
18 Thank you.
19 MR. HORTON: Member Yee.
20 MS. YEE: Thank you, Mr. Chairman.
21 I wanted to, uh, just focus a little bit on the
22 issue of the reported inventories. And, um -- because
23 it seems to me there's a little bit of a, uh,
24 inconsistency with respect to the, uh, audit period and
25 the periods for which inventories were reported.
26 And, uh, I want to maybe ask the Department. I
27 guess starting from the, um, 2008 report of zero dollars
28 in terms of the amount of inventory, um, moving through
18
1 the audit period, um, what did you take into
2 consideration with respect to --
3 MR. ALVISO: Okay. With regards to the
4 starting inventory stated on the federal income tax
5 return for 2008, it was listed as zero, although we --
6 we were aware that the taxpayer was making sales in 2007
7 and that there should have been some amount of inventory
8 existing at the end of the -- the year.
9 MS. YEE: Okay. But that was -- that was as a
10 different entity though, yes?
11 MR. ALVISO: Um --
12 MS. YEE: Different, um --
13 MR. ALVISO: The current -- the current permit
14 that we're discussing today actually had a start date of
15 October 1st of 2007.
16 MS. YEE: Okay.
17 MR. ALVISO: The sales -- or the federal income
18 tax return that was provided for that year did not
19 include a Schedule C, so there was no information on
20 that return that we could identify, with regards to
21 inventory.
22 MS. YEE: Okay.
23 MR. ALVISO: Um, there was a prior entity which
24 was a -- an LLC that operated through May of 2007.
25 Although, it's unclear if that -- and that business was
26 actually on the same road, I believe, in Folsom and was
27 also a MetroPCS dealer. So that we're uncertain if
28 there was actually a break in sales that had occurred in
19
1 2007.
2 MS. YEE: Okay.
3 MR. ALVISO: So, essentially, the auditor
4 considered --
5 MS. YEE: Like a continuous business.
6 MR. ALVISO: -- continuous business
7 operation.
8 MS. YEE: Um, and that's where I'm a little
9 troubled because it seemed like there was at least a
10 time break. And, uh, maybe I'd like to ask -- maybe
11 pose the same question to the petitioner, Ms. Craighton,
12 if you could. Can you elaborate on that?
13 MS. CRAIGHTON: We opened our store in May of
14 2008.
15 MS. YEE: May of 2008.
16 MS. CRAIGHTON: Correct. We got everything
17 lined up in 2007. I don't believe there was a store
18 there. It took a while for Metro to --
19 MS. YEE: Okay.
20 MS. CRAIGHTON: -- give us the approval.
21 MS. YEE: And -- and, from our perspective,
22 Department, the start date was October 1st, 2007?
23 MR. ALVISO: Correct.
24 MS. YEE: Okay.
25 MR. ALVISO: And the sales summary that was
26 provided identified dates of sales that had occurred.
27 MS. YEE: That had occurred at that time?
28 MR. ALVISO: Yes, during 2007.
20
1 MS. YEE: Okay.
2 MR. ALVISO: Let me confirm that.
3 Yeah, the earliest --
4 MS. YEE: Ms. Craighton, can you elaborate on
5 what those sales may have reflected at that period of
6 time?
7 MS. CRAIGHTON: I'm not sure, 2007. Some of it
8 was with Metro when they closed the other business, but
9 that wasn't my business. So I'm not sure.
10 MR. ALVISO: The, um -- the start date for the
11 permit --
12 MS. CRAIGHTON: Because we got some of the
13 inventory -- we bought some of the stuff from the prior
14 dealer, so I'm not sure. I'd have to ask the CPA if he
15 could figure it out.
16 MS. YEE: Although you reported zero inventory
17 for 2008.
18 MS. CRAIGHTON: No. In 2008 --
19 MS. YEE: Is that right?
20 MS. CRAIGHTON: We were selling in 2008. 2007.
21 MS. YEE: Okay. Maybe I'm getting my years
22 mixed up. I thought there was, uh, zero inventory
23 reported for 2008.
24 MR. ALVISO: The starting inventory was zero
25 for 2008.
26 MS. YEE: Okay.
27 MR. HANKS: Right. Right.
28 MS. YEE: So I'm just trying to reconcile
21
1 because in my mind, uh, the chronology is there was a --
2 a gap of several months, uh, when the prior entity
3 ceased to sell and now. And, according to the
4 Department, the beginning date of the business is
5 October 1st, 2007, uh, related to you. And, um -- but
6 you've just stated you didn't open the store until May
7 of 2008. And so I'm just trying to reconcile what the,
8 um, inventory looked like given all of that.
9 MS. CRAIGHTON: I don't know for sure.
10 MS. YEE: Okay.
11 MS. CRAIGHTON: I was going through chemo and I
12 had started it, stopped it and the store didn't open.
13 So I'm not sure on the dates.
14 MS. YEE: Okay. Okay.
15 MS. CRAIGHTON: I'd to have look it up. But
16 everything, according to our tax forms and on our bank
17 statements, which I have copies of, is all that we
18 received. And we had taken down two, uh, accordion
19 files. And I don't know if the papers are missing
20 because those are the original ones, which I had told
21 him.
22 MS. YEE: Okay.
23 Department, you, uh -- the reported
24 inventories, you had some concern about it really being
25 on the high side with respect to how much --
26 MR. ALVISO: Correct.
27 MS. YEE: -- was on hand. Yeah.
28 What would you typically expect?
22
1 MR. ALVISO: Um, I think it would depend on the
2 volume or the size of the retailer.
3 MS. YEE: Mm-hmm.
4 MR. ALVISO: In this case it was one location,
5 and I think it was like a 600-square-foot retail
6 location. And I don't know what we would anticipate. I
7 don't have that from the other audits of the MetroPCS
8 dealers. Um, but as mentioned in the D&R, it would
9 sim -- it would equate to, I think, 400 -- or 450 to 650
10 units on hand.
11 MS. YEE: Mm-hmm.
12 MR. ALVISO: Telephones. Which seemed
13 unusually high given the -- the size of the business --
14 MS. YEE: Right.
15 MR. ALVISO: -- and the single selling
16 location.
17 MS. YEE: Mm-hmm.
18 And you would agree, Ms. Craighton, that would
19 be very high, yes?
20 MS. CRAIGHTON: Extremely.
21 MS. YEE: Yeah.
22 MS. CRAIGHTON: I don't believe we ever had --
23 MS. YEE: Yeah.
24 MS. CRAIGHTON: -- more than 25 phones in
25 inventory at any time.
26 MS. YEE: Well, what I'm trying to do is -- is
27 to see what we have to substantiate a lower -- obviously
28 a lower volume, uh, that would be more consistent with
23
1 the, uh, size of your -- your business.
2 Okay. Well, Mr. Chairman, I'd like to see if
3 we can pursue something here to try to make some
4 adjustment relative to inventory. It does seem that,
5 uh, what the Department's relied on is, uh, not
6 reasonable, although we're lacking any other
7 substantiation to make an adjustment. But I'd like to
8 pursue that.
9 And, Ms. Craighton, if you could think about
10 what you may have that could document --
11 MS. CRAIGHTON: Right.
12 MS. YEE: -- another number.
13 MR. HORTON: Member Steel.
14 MS. STEEL: Actually, I'm done.
15 MR. HORTON: Member Runner.
16 MR. RUNNER: Yeah, maybe to kind -- to kind of
17 just follow up on some of that.
18 Let me, to -- to the Department, um, what were
19 we able -- I have a figure here and I just want to see
20 if you have the same figure or if the figure -- how --
21 how we may have calculated it or if we did.
22 Uh, on -- on the federal income tax, do we have
23 a total for the amount of the, uh, purchases, taxable
24 purchases that were made during that period of time?
25 MR. ALVISO: For 2008, it was 163,471.
26 MR. RUNNER: Right. And the period -- do you
27 have for the whole audit period?
28 MR. ALVISO: Um, we didn't have a return for
24
1 2007 or 2010 that identified purchases. So we -- they
2 basically used amounts reported, purchases reported on
3 2008 and 2009 federal income tax returns.
4 MR. RUNNER: And so what was that total? Do we
5 have a total then for the -- for that -- for the audit
6 period based upon our calculations?
7 MR. ALVISO: Yes. It was just over 250,000.
8 MR. RUNNER: Well, my notes here show that we
9 had a -- again, that's why I'm not sure how you're
10 showing it versus what I'm showing it. That's why I'm
11 kind of asking.
12 A total -- on the -- on the federal income tax
13 returns a total of 495,000, plus some change, on, um,
14 purchases during the audit period on the -- based upon
15 what was -- what was reported and also based upon how we
16 did the calculations. Is that -- is that number close
17 to where you are? Do you have that number anywhere?
18 MR. ALVISO: I'm sorry. What -- what was the
19 number again?
20 MR. RUNNER: 495,541 is what I have.
21 MR. ALVISO: Let me look.
22 MR. RUNNER: That was based upon the returns
23 plus, I think, based upon our calculations for the
24 other -- for the other years.
25 Here's the reason I'm -- let me -- I mean --
26 here's the reason I'm asking if indeed that's the right
27 number for total. And that is, what I'm trying to get
28 around, get -- get my head around is that -- that, at
25
1 least in our calculation based upon the numbers we -- we
2 extrap -- I think from some of the things you had, uh,
3 that was the -- on the federal income tax side, what the
4 total -- what the total, uh, taxable purchases that were
5 on the federal income tax.
6 And then -- but then we went ahead and
7 calculated the total -- the total taxable sale at
8 749,000. So I was just trying to figure out the
9 difference. How did we -- how did -- how did we get to
10 749,000 taxable sale when this -- when the federal
11 income tax showed purchases of taxable items of 400?
12 Kind of goes to the -- in a different
13 direction, the same issue that -- that Member Yee was
14 talking about; and that is what seems to be a, uh -- an
15 overstatement of inventory.
16 You see the numbers that I'm looking at?
17 MR. HANKS: I don't have a copy of -- of your
18 schedules, but we are looking at the schedules that
19 we've used. So we've -- we've got the -- the purchases
20 valuations. We've -- we've got the expected markup
21 factor that we've applied to that.
22 MR. RUNNER: Skip the markup factor. Just go
23 right -- just -- just skip right to the issue of -- of,
24 um, what do you have down as the total number of -- of
25 purchases that were identified as taxable on the, uh --
26 on the federal income tax?
27 MR. HANKS: 194,135 for 2009.
28 MR. RUNNER: Right.
26
1 MR. HANKS: And 163,471 for 2008.
2 MR. RUNNER: Right.
3 MR. HANKS: And then for '07 --
4 MR. ALVISO: It was estimated.
5 MR. HANKS: -- an estimated amount of 45,000
6 for that period.
7 MR. RUNNER: 45 or 40? I have 40,000 -- I have
8 40,867.
9 MR. HANKS: We have 45,000 --
10 MR. RUNNER: Okay.
11 MR. HANKS: -- for that period.
12 MR. RUNNER: Okay. And then --
13 MR. ALVISO: Then we would have the two
14 quarters in 2010 as well.
15 MR. RUNNER: And that was -- and that total is
16 what?
17 MR. ALVISO: They -- they -- for 2010 they used
18 a quarterly average of 2009 purchases.
19 MR. RUNNER: And was there a total?
20 MR. ALVISO: Do you have it in front of you?
21 MR. RUNNER: I have 97,000 for that one.
22 MR. ALVISO: That would be -- yeah.
23 MR. RUNNER: About right?
24 MR. ALVISO: Yes.
25 MR. RUNNER: Okay. So -- okay. So -- so,
26 okay. Within $5,000.
27 Again, those totals right there then, even with
28 your -- your $5,000 additional --
27
1 MR. HANKS: Right.
2 MR. RUNNER: -- is about $500,000 of total
3 taxable sale that pulled off of her income tax -- or
4 total taxable purchases -- purchases that were taxable
5 that were pulled off of her federal income tax or
6 estimated.
7 So my question is, we estimated the taxable
8 sales at 749,000. I'm just wondering where the half a
9 quarter of a million dollars came from.
10 MR. ALVISO: As I understand it, purchases
11 would be reported at cost. And based on our knowledge
12 of the MetroPCS dealers in the area at the time, on
13 average they had a 50-percent markup.
14 MR. RUNNER: Wasn't our markup -- I'm sorry.
15 Maybe -- okay. So --
16 MR. HANKS: Actually, in looking at -- at the
17 work papers that -- that I'm looking at, we've -- we've
18 got the same numbers.
19 So our -- so our estimated quarterly taxable
20 measure for the entire audit period is measured by
21 749,000. We're comparing that against --
22 MR. RUNNER: That's the taxable sale. Now is
23 that -- with the markup, is that inclusive of the markup
24 then at that point?
25 MR. HANKS: Yes.
26 MR. RUNNER: Okay.
27 MR. HANKS: Yes. So then we compare that
28 factor against the -- the reported taxable --
28
1 MR. RUNNER: So that includes -- that includes
2 the 50-percent markup --
3 MR. HANKS: Correct.
4 MR. RUNNER: -- at that point.
5 MR. HANKS: Correct.
6 MR. RUNNER: The 749,000.
7 MR. ALVISO: Yes.
8 MR. HANKS: Yes.
9 MR. RUNNER: Taxable sale of about 500,000 with
10 markup then, uh --
11 MR. HANKS: Right.
12 MR. RUNNER: Taxable purchases -- purchases
13 that are taxable of about -- in terms of her cost, about
14 a half a million dollars. And then her -- her -- with
15 her -- with the markup that we are estimating at 50
16 percent, then going to the 200 -- 200 -- or the
17 749,000.
18 MR. HANKS: Exactly.
19 MR. RUNNER: 750,000.
20 MR. HANKS: Exactly.
21 MR. RUNNER: Okay.
22 How do you -- what do we handle -- some of
23 these invoices that were -- that were -- that were
24 shown, that showed, um, sales, um, below costs, how did
25 we account for those? I mean, did we -- did we think
26 that was an anomaly? Did we think that that -- that
27 that did not represent the normal kind of business?
28 How -- how did -- you know, the ones that I
29
1 saw, you know, that showed -- one of them, I think, was
2 at 50 percent -- I mean, the, uh -- the, uh -- the sale
3 was 50 percent of the cost of the purchase. And I think
4 the other one was more like, uh, I think 33 percent or
5 something like that.
6 How -- how -- did we -- did we handle those as
7 anomalies then?
8 MR. ALVISO: Um, they were not accepted. There
9 was only two provided in the entire, um, FBO period, and
10 they were provided after the appeals conference. But
11 they did look at them and they did consider them.
12 However, when I reviewed the file myself, I had
13 questions regarding the two examples that were provided.
14 Um, and looking at the first invoice, it was dated --
15 the sales invoice was dated October 18th, 2008. The
16 product code mentioned or described on it was a product
17 code 328, which is, I believe, the taxpayer's internal,
18 uh, product code assignment. And it's described as a --
19 I might be pronouncing this incorrectly -- Huawei.
20 MR. RUNNER: Yeah.
21 MR. ALVISO: Number 318.
22 MR. RUNNER: 318, mm-hmm.
23 MR. ALVISO: And it was showing a sale price
24 of -- a net sale price, essentially, of $10 plus tax.
25 MR. RUNNER: Right.
26 MR. ALVISO: Um, included in that was an
27 accompanying purchase invoice or purchase order.
28 MR. RUNNER: Right.
30
1 MR. ALVISO: For purchases of a Huawei --
2 actually a Model 328.
3 MR. RUNNER: Right.
4 MR. ALVISO: So the number was different.
5 But it did show a purchase price of $409 total,
6 or approximately $41 per piece.
7 MR. RUNNER: Right.
8 MR. ALVISO: The purchase order date was
9 actually dated December 31st, 2008, which was more
10 than -- more than two months after the sale had
11 occurred. Um, I also thought it would be maybe common
12 practice that when a phone was sold that the ESN or
13 other type of serial number would be referenced on
14 the -- the sales invoice itself, and I didn't see that
15 on this.
16 MR. RUNNER: Is that typical? I mean when you
17 say -- is that what normally takes place?
18 MR. ALVISO: I believe so. I believe with any
19 type of serialized or -- or electronic device, including
20 cell phones, I believe that was --
21 MR. RUNNER: Is that required?
22 MR. ALVISO: I don't believe it's required.
23 MR. RUNNER: Okay.
24 MR. ALVISO: Um, in addition to those
25 differences, um, I -- I didn't see --
26 MR. RUNNER: So the issue on this particular
27 invoice is the fact that it has the -- the sale proceeds
28 the purchase order.
31
1 MR. ALVISO: That was one of the issues.
2 MR. RUNNER: Okay. And -- and the other issue
3 is that the product description seems to describe two
4 different products --
5 MR. HANKS: Correct.
6 MR. RUNNER: -- 118 versus 124.
7 MR. HANKS: Correct.
8 MR. RUNNER: Okay. Let me ask the taxpayer
9 about those discrepancies on that particular issue.
10 MS. CRAIGHTON: It is possible to sell a phone
11 before we have it in. You can come in and say you want
12 this particular phone and we would sell it to you. And
13 then when the phone did arrive, you would get the
14 phone.
15 MR. RUNNER: People would wait two months for
16 their phone?
17 MS. CRAIGHTON: On some phones, yes. I only
18 know of one person who did that. Most of it, though,
19 was only four to five days at the very most. And there
20 are different phones --
21 MR. RUNNER: Well, these -- these are -- you --
22 you gave us -- you turned these in. So is that how
23 you -- is that how you would describe why it is that
24 these are --
25 MS. CRAIGHTON: I know of -- I know of one that
26 waited a long time. But it is a common practice that we
27 did.
28 MR. RUNNER: Okay. Let me go to the second --
32
1 MS. CRAIGHTON: If we didn't have the
2 inventory, they could pay for it and then we could get
3 it for 'em.
4 MR. RUNNER: Okay. Let me go to the second --
5 the second invoice then. How -- why did we discount the
6 second invoice?
7 MR. ALVISO: Okay. Um, if I can add, also,
8 with regards to both of the invoices --
9 MR. RUNNER: Uh-huh.
10 MR. ALVISO: -- um, I did not see necessarily a
11 discrepancy with regards to the second invoice as far as
12 date or model number listed, the date of the sales
13 invoice versus the date purchase order. However, I did
14 note the same thing, there was no serial number or
15 ESN.
16 MR. RUNNER: But that's not required, right?
17 MR. ALVISO: It's not required.
18 MR. RUNNER: Okay. I mean, if it's not
19 required -- I guess it's an interesting issue. But if
20 it's not required, it's not required.
21 MR. ALVISO: Okay. The -- I also noted,
22 though, in looking at the documents that the taxpayer
23 had provided, there was also a purchase order summary
24 that was provided at one point that was about 10 pages
25 long and it listed several different products that were
26 purchased over the course of the FBO period.
27 There were no phones listed on this purchase
28 order summary, only accessories, including travel
33
1 chargers and cases and so forth. Um, included on that
2 were, um, a list of products. And I noted that the
3 product codes listed here was a 325 and a 328. Both of
4 those were travel chargers that were apparently used
5 with either a Huawei 318 phone or a Starcom 1450 phone.
6 Um, the purchase amount for those two
7 accessories, the cost was $2.73. And in my mind, um, it
8 seemed to be logical that selling a travel charger for
9 $10 or $20 seemed more likely than a telephone.
10 MR. RUNNER: Well, hold on. Okay. Again,
11 I'm -- I'm just looking at the invoice here, so --
12 MR. ALVISO: Okay.
13 MR. RUNNER: I'm just looking at the second
14 invoice. The second invoice is for a product. And it's
15 described as a product, as a -- I can't read it here.
16 Star something or other, 1450.
17 MR. ALVISO: Correct.
18 MR. RUNNER: Okay. And I've got -- I've got an
19 invoice for sale, and then I have a purchase order.
20 Now, what's that have to do with a charger?
21 MR. ALVISO: Um, you'll note on the sales
22 invoice that it has a product code next to the
23 description of the product, on the sales invoice, of a
24 325. It has --
25 MR. RUNNER: 325 product code, right.
26 MR. ALVISO: Yes.
27 On this purchase order summary, this listing
28 several purchases over the course of the FBO period --
34
1 MR. RUNNER: Uh-huh.
2 MR. ALVISO: -- there is also a product with a
3 product code 325 that's described as a Starcom 1450
4 travel charger.
5 So, there were the same product codes listed on
6 those sales invoices.
7 MR. RUNNER: But I'm reading the line that says
8 "product description."
9 MR. ALVISO: Right.
10 MR. RUNNER: Product description is exactly the
11 same, right? It's describing a phone.
12 MR. ALVISO: It is, and I -- and I'm going by a
13 purchase order summary that the taxpayer had provided to
14 us.
15 MR. RUNNER: Well, okay. Again, I've got an
16 invoice here that says a phone, and it lists the kind of
17 phone it is. And I've got the invoice and I've got the
18 purchase order, and it's talking about phone, not about
19 a charger, right?
20 MR. ALVISO: Um, the description itself doesn't
21 mention "phone" in the description. It does mention a
22 model number.
23 MR. HANKS: And then the model numbers that we
24 have --
25 MR. RUNNER: So you think -- are you telling me
26 what you think the taxpayer has done is substituted,
27 um -- a -- a, uh -- a, uh -- a, uh, invoice for a
28 charger as a -- and a -- and a purchase order for the
35
1 phone?
2 MR. ALVISO: I'm just pointing out that the
3 product codes that are listed on the sales invoices are
4 the same product codes that are described to as
5 accessories to the phones.
6 MR. RUNNER: But not on these two -- not on
7 these two.
8 MR. ALVISO: Not on those, but within the
9 taxpayer's records that they had provided.
10 MS. CRAIGHTON: The codes are put in there
11 by the inventory --
12 MR. RUNNER: Let me -- well -- let me ask the
13 taxpayer to explain why it is that they might decide
14 that these two in -- that this invoice does not go with
15 this purchase order because some other paper over here
16 indicates that it could be a charger.
17 MS. CRAIGHTON: Does it say "car charger" or
18 "phone"?
19 MR. RUNNER: Well, on these two it says
20 "phone."
21 MS. CRAIGHTON: It's the same -- it's the
22 same --
23 MR. RUNNER: So on these two it says
24 "phone" that's why I'm --
25 MS. CRAIGHTON: It's the same product code for
26 the -- for the, um -- the product code would be like
27 "325." Is it a car charger or is it a home charger or
28 is it a phone? It will say on there.
36
1 MR. RUNNER: It will say on what?
2 MS. CRAIGHTON: It will say on the
3 description.
4 MR. RUNNER: Well, this -- this says -- this
5 just says Starcom or something 1450. Is that a phone or
6 a charger?
7 MS. CRAIGHTON: If it's a phone, it would say,
8 uh, "phone." If it's a car charger or travel charger --
9 MR. RUNNER: Okay. It doesn't say.
10 MS. CRAIGHTON: Yeah, I don't know.
11 MR. RUNNER: Okay, thank you.
12 MS. CRAIGHTON: I'd have to look at it.
13 MR. RUNNER: Thanks.
14 MS. CRAIGHTON: I'd be glad to look at it
15 though.
16 MR. HORTON: Further discussion, Members?
17 MS. MANDEL: Yeah, um --
18 MR. HORTON: Member Mandel.
19 MS. MANDEL: Just a question.
20 Um, my recollection was that there was a --
21 didn't know what was on -- gross receipts on the income
22 tax returns, so you couldn't -- one thing that I heard
23 somewhere along the way was that the, um -- and I
24 haven't done the math, but that the total sales the
25 Department was asserting were greater than gross sales
26 on the income tax returns, by some 150 maybe. Is
27 that -- you're nodding yes. Are you nodding yes --
28 MR. ALVISO: It was greater.
37
1 MS. MANDEL: -- because you hear what I'm
2 saying or because that's -- I'm remembering it right?
3 It was greater?
4 MR. HANKS: It was greater.
5 MS. MANDEL: So -- so, we're saying there were
6 more sales than even were reported on the income tax
7 returns?
8 MR. ALVISO: Correct.
9 MS. MANDEL: Um, and that part of your issue --
10 I -- I understood that the taxpayer was saying that,
11 um -- that there were -- that amounts that, um, were
12 their commissions -- which I guess is what they kept
13 back from what went over to MetroPCS, whether through
14 the Qpay system or perhaps another system, um -- was --
15 was in numbers that you worked from.
16 That's kind of what I vaguely remember hearing
17 about this. And that one of the issues was that you
18 couldn't figure out what was actually in the numbers on
19 the income tax return, or you couldn't figure out how
20 much was being held back and how much was being sent
21 off.
22 Had you seen the bank statements before?
23 MR. ALVISO: I had not seen the bank statements
24 before. I did look at them this morning.
25 MS. MANDEL: Oh, okay. I should have asked
26 that first. Because that's how I understand they now
27 have all these banks statements.
28 MR. ALVISO: The bank statements, uh, that the
38
1 taxpayer had with her this morning were from December
2 2008, um, through the end of 2010. I looked at those
3 and I was looking at the deposits, and I was -- I did
4 see the Qpay transactions where they would basically
5 debit the bank account for the amounts.
6 MS. MANDEL: Right.
7 MR. ALVISO: Um, one thing I noted and then
8 I -- I did not have time to tie them together, but the
9 monthly Qpay reports that were previously provided --
10 MS. MANDEL: Correct, okay.
11 MR. ALVISO: -- showed transactions of
12 approximately 45,000 to 50,000 per month, of which the
13 taxpayer was retaining 2200 or so.
14 MS. MANDEL: Okay, right.
15 MR. ALVISO: So that means, um, if the gross
16 receipts had included all those amounts --
17 MS. MANDEL: All which amounts? The 50,000?
18 MR. ALVISO: The Qpay, yeah, the monthly Qpay
19 of 45 to 50,000.
20 MS. MANDEL: Yeah.
21 MR. ALVISO: That gross receipts would be over
22 500,000, plus whatever sales of accessories of phones
23 would be. But that wasn't the case. The gross receipts
24 were significantly less.
25 MS. MANDEL: Well, okay. So let me ask you
26 something completely different. And maybe this is what
27 they were talking about before.
28 But when we, um -- when we do a methodology,
39
1 which is kind of what you did, you said 50 percent is
2 going to be the markup we'll apply to your, um -- the
3 cost of goods sold on your income tax returns. And I
4 haven't particularly heard -- I'm not sure if there's
5 been much dispute or if there's something about what's
6 in the cost of goods sold number on the income tax
7 returns. But that's what you applied, a 50-percent
8 markup.
9 They're saying, well, you know, we didn't
10 even -- we sold them under cost. The MetroPCS, um,
11 agreements had a range of -- well, I guess it was
12 probably by phone. But the way it was laid out in the
13 D&R was there was kind of a range of suggested markup.
14 Fifty percent's kind of in the mid-range of that;
15 although they had some, I guess, that were lower. And,
16 um, we don't know what the mix of phones were, so you
17 don't know maybe if they were selling ones that were
18 lower end.
19 But when you do a methodology, take the cost of
20 goods sold at 50 percent, 750,000 total -- total taxable
21 sales, and then you look at the income tax returns where
22 the reported gross sales are a fair amount, you know,
23 less than that, um, what's the auditor's next -- I mean,
24 does he just go, "Oh, well," or -- I mean, does that
25 make you kind of wonder about things, life in general
26 or --
27 MR. HANKS: Ms. Mandel.
28 MS. MANDEL: I'm really not feeling too good
40
1 today, so all kinds of weird things are coming out of my
2 mouth. But, you know what I mean.
3 MR. HANKS: Right, right.
4 I -- I think in this case what the auditor was
5 probably considering is that, with respect to the Qpay
6 transactions, that -- that the -- the taxpayer would
7 probably be obligated to -- to report income tax on --
8 on whatever the difference is that they're going to be
9 earning.
10 MS. MANDEL: The 2200.
11 MR. HANKS: So the 2200.
12 MS. MANDEL: Okay. But you would --
13 MR. HANKS: So they would be looking for that.
14 MS. MANDEL: I understand, but you're still --
15 you're -- you're saying that their total taxable sales,
16 without regard to other money they made in this business
17 that might be on an income tax reporting for the
18 schedule, for this business -- which I have here
19 somewhere, but I can pull it up. But you're still
20 saying your total taxable sales are 150,000 more than
21 they're reporting as their total gross.
22 So, if they -- if their 600,000 or whatever it
23 was of what they reported includes the 2200 a month,
24 then their reported taxable sales in terms of what would
25 be on the income tax return would be even less, not, you
26 know, more. But I'm just -- do we just not then look at
27 the income tax return anymore? I'm just --
28 MR. HANKS: No. No.
41
1 Um, you know, in -- in fact in a lot of the
2 cases that -- that we're looking at, we're looking at
3 income tax returns to -- to see what the measure of
4 costs are because it's often times through our analysis
5 of cost of goods sold that -- that we can make a
6 reasonable estimation of --
7 MS. MANDEL: Right. I'm just --
8 MR. HANKS: -- what -- what the sales were.
9 MS. MANDEL: I understand. And you looked at
10 cost goods sold. And we often mark up cost of goods
11 sold.
12 MR. HANKS: Right.
13 MS. MANDEL: And you picked a 50-percent markup
14 because you thought that made sense based on your
15 experience, and the MetroPCS has -- has all these
16 different types of phones, and the range is 30-something
17 to 98-percent markup. So you're like, eh, you know, 50
18 percent, based on our experience, 50 percent's good.
19 It's within the range of all the total kinds of phones
20 MCS -- Metro is saying. So, not so bad.
21 I'm just saying when you look at them, what's
22 reported on the federal income tax return for gross
23 receipts, if it's so much less than what your
24 alternative methodology came up with using the 50
25 percent, does that cause you to question -- even if you
26 accept the cost of goods sold and say that's -- we're
27 going to -- that's solid. They're reporting -- we're
28 going to -- that's the best we got for sort of the
42
1 amount of what's there. Does that --
2 MR. HANKS: Right, right.
3 MS. MANDEL: -- cause you to say, well, maybe
4 50 percent, you know -- is there an issue with the 50
5 percent if we're coming up with the number that's --
6 I can't do the math that fast. But, what, 25 percent
7 higher than --
8 MR. HANKS: Right.
9 MS. MANDEL: Almost 25 percent higher than what
10 they -- or 15 percent -- I don't know. Can't do the
11 math in my head today --
12 MR. HANKS: Right, right.
13 MS. MANDEL: -- than what they reported as
14 gross. Or do we just walk -- or does the auditor just
15 go, 50 percent made sense, so --
16 As a -- standing alone as an element, 50
17 percent makes sense.
18 MR. HANKS: Right.
19 MS. MANDEL: And I'm saying when you're done
20 with the calculation, what do you look at to say, if you
21 have something like the income tax return that you
22 started from --
23 MR. HANKS: Right, right.
24 MS. MANDEL: -- is that a validation? Or does
25 it say, oh, I came up with the number that's so much
26 higher than what's on the income tax return, that maybe
27 there's something else going on in my number or --
28 MR. HANKS: Right, right.
43
1 MS. MANDEL: You know?
2 MR. HANKS: Right. I think probably the staff
3 is -- is mindful of the differences between the declared
4 amounts on the income tax returns and their calculation
5 of audited taxable sales.
6 So I think what they're trying to do thought
7 is -- is to reconcile in their mind which is the -- the
8 best information available, um, in the absence of
9 information that would indicate, for instance, that --
10 that these contracts were sold in a bundled basis
11 where -- where a markup would be calculated differently
12 in accordance with the regulation.
13 Um, I think they're thinking that the best
14 information available is this estimated markup, based on
15 our audit knowledge of -- of auditing similar businesses
16 within the -- the same location, general location, that
17 the 50-percent markup is approximately correct for --
18 for this type of -- of dealer.
19 And irrespective that the numbers aren't
20 necessarily tying between audited taxable sales and
21 reported amounts in the income tax returns, we -- we
22 frequently see differences between those valuations.
23 But we go with the -- the best information, best
24 valuation we can make at the moment.
25 MS. STEEL: Just one --
26 MR. HORTON: Member Steel.
27 MS. STEEL: -- one more thing that on 2007, you
28 say store was not even opened.
44
1 When store was opened exactly?
2 MS. CRAIGHTON: We got the store, but it wasn't
3 open. But we got the storefront.
4 MS. STEEL: When did you open?
5 MS. CRAIGHTON: But we opened for business, uh,
6 May of 2008. But there was a discrepancy because the
7 other store that had closed, some of the inventory was
8 bought off of that, and then it was sold to another
9 company.
10 MS. STEEL: So how Department came out with the
11 numbers of like sixty -- 7,500 for fourth quarter of
12 2007 and first quarter of 2008 for $61,302?
13 MR. ALVISO: Included, uh, with the documents
14 that the taxpayer had provided was a sales summary. It
15 was just like a single line for each transaction. This
16 was a monthly report, um, summary report that the
17 taxpayer had provided. And the earliest report that was
18 provided was for the month of November 2007; and it
19 showed sales occurring, um, beginning in November
20 2007.
21 MS. STEEL: So this taxpayer filed the report?
22 MR. ALVISO: Not a --
23 MS. STEEL: A return?
24 MR. ALVISO: Not a sales tax return, but within
25 their own Point of Sale system they had provided us with
26 a sales summary from that system, and it showed sales in
27 November 2007.
28 MS. STEEL: So if you didn't open until
45
1 May 2008 --
2 MS. CRAIGHTON: That was the one that we sold
3 to the other company. Because the LLC that had closed
4 down the street --
5 MS. STEEL: So it was not your store --
6 MS. CRAIGHTON: No.
7 MS. STEEL: -- at that time?
8 MS. CRAIGHTON: No. But there -- there were
9 sales and it was reported, whatever that report was
10 made. The POS --
11 MS. STEEL: So you didn't own that company
12 until May of 2008?
13 MS. CRAIGHTON: Correct.
14 There's a cross-over on the LLC because
15 MetroPCS did not give me the authorization to take
16 over.
17 MS. STEEL: So you have documents that you took
18 over on May of 2008, from MetroPCS?
19 MS. CRAIGHTON: I just have the, uh, paperwork
20 from the landlord.
21 MS. STEEL: So you never even own until May of
22 2008?
23 MS. CRAIGHTON: I had the store open, but I
24 wasn't open for the public. I have sales that went
25 to --
26 MS. STEEL: But how did you --
27 MS. CRAIGHTON: I have sales that went to the
28 other company.
46
1 MS. STEEL: So she didn't even have store open
2 until May of 2008. How we going to --
3 MR. ALVISO: The -- the, um, Point of Sale --
4 sales summary that I'm looking at that goes back to
5 November 2007, it doesn't seem to be like a bulk
6 transaction. Each sale is individually identified. And
7 under "described" is "walk-in customer," what they --
8 MS. STEEL: But the 67,000 assumption is very
9 high even though that even she ran the business from
10 October of 2007 because her average is what here? About
11 61 to $72,000. So how that amount comes out?
12 Because, if she just took over the business and
13 she never even opened it until May of 2008, then it --
14 that cannot be for $67,000 for first quarter, right? I
15 mean for a quarter of business started.
16 MR. HANKS: I think the difficulty is that
17 we've -- we've got the sales by product code
18 identifying, um, in fact, the salesperson name. We can
19 tell you the name of the salesperson making the sale to
20 a walk-in customer on a particular date.
21 MS. STEEL: But she -- she has the documents
22 that she took over this store on May of 2008.
23 MR. ALVISO: We haven't -- we haven't seen that
24 document if -- um, if it's been provided.
25 MS. STEEL: You say you have documents --
26 MS. CRAIGHTON: My landlord --
27 MS. STEEL: -- from your landlord.
28 MS. CRAIGHTON: -- for my rental.
47
1 MS. STEEL: So we cannot really ask some other
2 taxpayers to pay for somebody else's portion of taxes.
3 MR. ALVISO: And the document that we are
4 looking at was, um, provided by the taxpayer, um,
5 initially. I think it was early, but --
6 MS. STEEL: Thank you.
7 MR. RUNNER: Quick question. Um --
8 MR. HORTON: Member Runner.
9 MR. RUNNER: Kind of follow-up on that.
10 When did you -- when -- when did we have this
11 taxpayer opening up a permit?
12 MR. ALVISO: The start date was October 1st,
13 2007. That was the date listed.
14 MR. RUNNER: And when -- and when did we have
15 as her first file? When did she file?
16 MR. ALVISO: I believe, uh, first quarter
17 and -- excuse me, fourth quarter 2007 and first quarter
18 2008 were filed with zero sales reported.
19 MR. RUNNER: Okay.
20 MR. ALVISO: On the sales and use tax returns.
21 MR. RUNNER: Okay. So she opened -- so -- so
22 help me understand then how you took out a permit in --
23 in -- in 2007? Uhmm --
24 MS. CRAIGHTON: Because I thought I was just
25 going to be able to open the door and sell. But I had
26 to wait to get approval from Metro.
27 MR. RUNNER: Okay.
28 MS. CRAIGHTON: So all my -- I had to get my,
48
1 um -- all my accounts set up.
2 MR. RUNNER: Okay. Okay. So you -- so you --
3 so you're going to go into this business.
4 MS. CRAIGHTON: Correct.
5 MR. RUNNER: You got possession of the -- of
6 the -- of the store.
7 MS. CRAIGHTON: Correct.
8 MR. RUNNER: You went ahead and got your
9 permit.
10 MS. CRAIGHTON: And then I started getting
11 inventory.
12 MR. RUNNER: Then you started filing your --
13 MS. CRAIGHTON: Right.
14 MR. RUNNER: Based upon the fact that you had a
15 permit and you need to start filing.
16 MS. CRAIGHTON: Correct.
17 MR. RUNNER: You filed during those times zero
18 because you had no sales during that time.
19 MS. CRAIGHTON: Correct.
20 MR. RUNNER: So help me under -- then --
21 then --
22 MS. CRAIGHTON: Well, they have a POA over
23 there. And I'm not sure if it's Folsom Wireless,
24 because the POA that you print out will print out
25 everything on there. So, um --
26 MR. RUNNER: So you're not sure what they're
27 talking --
28 MS. CRAIGHTON: I know what they have because I
49
1 gave it to them. Whatever our POA system had, I printed
2 everything out.
3 MR. RUNNER: Okay. But -- but are you
4 saying -- but they're saying that on that it shows
5 actual customer activity --
6 MR. HANKS: Right.
7 MR. RUNNER: -- during the month of November,
8 correct?
9 MR. HANKS: Correct.
10 MR. RUNNER: So what would they have that you
11 had given them that would show them customer activity in
12 the month of November when it is that you weren't making
13 any sales?
14 MS. CRAIGHTON: That would be them.
15 MR. RUNNER: Uh --
16 MS. CRAIGHTON: The person that I bought the
17 business -- that POA, the TeleTracker, that's
18 TeleTracker. I -- I bought their TeleTracker. So in
19 order to use TeleTracker for the inventory, that's what
20 I have.
21 MR. RUNNER: So who was making those sales at
22 that time?
23 MS. CRAIGHTON: I don't know.
24 The LLC that had it before, I thought they
25 closed out in June or July, the other Metro store. I
26 just got the TeleTracker, um, software or the access to
27 the code.
28 MR. RUNNER: So you think that this report that
50
1 they're looking at right now is an indicate -- is a
2 report of sales that were done by the previous owner?
3 Or somebody else?
4 MS. CRAIGHTON: Well, it could also be a dummy.
5 Because you can go in there and type a Point of Sale.
6 And then if you don't go back in there and cancel it,
7 you have --
8 MR. RUNNER: So why would somebody print out a
9 dummy?
10 MS. CRAIGHTON: For practicing.
11 MR. RUNNER: Oh.
12 MS. CRAIGHTON: When we were doing training.
13 MR. RUNNER: Oh.
14 MS. CRAIGHTON: Because I know we did do some
15 for training that were not cancelled. But I don't have
16 any -- in 2007, the bulk that I sold --
17 MR. RUNNER: Do you have any -- what do you
18 have? Do you have anything that indicates the kind of
19 business that -- I mean, the nature that you weren't
20 doing your business? Is that when you said something
21 about the landlord? You have something that indicates
22 that you were not doing traffic business in and out of
23 your store in the months of November and December?
24 MS. CRAIGHTON: I -- I just have my -- my bank
25 statement. But the bank ordered my 2008 bank statement
26 because it was, uh, too late.
27 MR. RUNNER: Okay. And your bank statement for
28 those months indicates what?
51
1 MS. CRAIGHTON: Which would indicate what I
2 have coming in and going out.
3 MR. RUNNER: And do they -- they indicate that
4 there's not a lot of sales going on?
5 MS. CRAIGHTON: I don't have anything going
6 on.
7 MR. RUNNER: Okay. They indicate that there's
8 nothing going on?
9 MS. CRAIGHTON: Yeah. Yeah, I just have my
10 monthly service fee generated, $15 a month.
11 MR. RUNNER: So your bank statement would not
12 identify the kind of traffic that they're showing in
13 this -- in that Point of Sale --
14 MS. CRAIGHTON: For 2007.
15 MR. RUNNER: -- for 2007.
16 And we have not -- we -- we -- we've -- I'm
17 trying to remember, we -- we have those bank statements
18 now and we haven't -- and we haven't looked at them yet?
19 Or remind me what we had said on that?
20 MR. ALVISO: I reviewed the bank statements
21 prior to today.
22 MR. RUNNER: Uh-huh.
23 MR. ALVISO: The Board meeting today. I do not
24 have copies of them, but I did have time to look at
25 them.
26 MR. RUNNER: Yes.
27 MR. ALVISO: The earliest bank statement that I
28 saw in the stack was December 2008. I didn't see
52
1 anything earlier than that date.
2 MR. RUNNER: Okay.
3 MS. CRAIGHTON: He gave them back to me. I
4 made copies.
5 MR. RUNNER: Do you have -- and do you, right
6 now, have --
7 MS. CRAIGHTON: Yeah.
8 MR. RUNNER: -- December -- do you have
9 Decem -- do you have 2007 bank statements?
10 MS. CRAIGHTON: No, nothing for seven. Only
11 for eight.
12 MR. RUNNER: Well, aren't we talking about
13 seven, though? Aren't --
14 MS. CRAIGHTON: We are.
15 MR. RUNNER: So, you have no bank statements
16 for 2007; is that what you're saying?
17 ---oOo---
18
19
20
21
22
23
24
25
26
27
28
53
1 MS. CRAIGHTON: It starts in 2008.
2 MR. RUNNER: Okay. So, do you have -- could
3 you get bank statements for --
4 MS. CRAIGHTON: I've ordered them.
5 MR. RUNNER: -- you've ordered them?
6 MS. CRAIGHTON: Yes.
7 MR. RUNNER: Okay. So, you've -- they're
8 available. You don't have them --
9 MS. CRAIGHTON: No.
10 MR. RUNNER: -- nor has the Department been
11 able to -- to see those?
12 Is that -- 'cause it seemed to me that would be
13 pretty helpful. That indicate if -- if, indeed, you saw
14 no -- no deposits going on during that time, that would
15 certainly then call into question the record that we
16 would have, right?
17 I mean, if we had bank statements that actually
18 showed no --
19 MR. ALVISO: Correct.
20 MR. RUNNER: -- money moving in and out of the
21 business, that would certainly corroborate what she's
22 saying, right?
23 MR. HANKS: That would assist us.
24 MR. RUNNER: It's pretty critical.
25 Okay.
26 MS. CRAIGHTON: They ordered from the back
27 office on 1-10.
28 MR. RUNNER: And you haven't received them yet?
54
1 MS. CRAIGHTON: No, he just gave me the
2 receipt.
3 MR. RUNNER: Okay. Okay, well, it seems to me
4 that either -- there's -- there is some issues missing
5 here and I'm not sure how we can go forward, at least
6 until that is satisfied, because those would be critical
7 issues, at least for that -- those months that we're
8 talking about here.
9 Thanks.
10 MR. HORTON: Question of the taxpayer.
11 Did you purchase from anyone other than Metro
12 PC -- your phones?
13 MS. CRAIGHTON: No.
14 MR. HORTON: No? Was there --
15 MS. CRAIGHTON: I have this last -- the last
16 quarter I got one at Best Buy, but that was something --
17 MR. HORTON: Okay. Do you have a contractual
18 relationship with Metro that requires you to maintain a
19 certain level of inventory?
20 MS. CRAIGHTON: I believe we did because that's
21 why we were -- they told us that we had to sell phones
22 for a higher price and keep more phones in stock.
23 MR. HORTON: Okay. Question of the Department.
24 Is there any reason we didn't take a look at
25 the purchases from Metro and use those in computing
26 sales of phones?
27 MR. ALVISO: The -- as I understand it, the
28 vendor for the telephones at Metro PCS is Breakpoint and
55
1 it's the vendor that, I believe, Metro PCS dealers have
2 to purchase their phones from.
3 I talked to the auditor and he indicated that
4 they requested the purchase information from Breakpoint,
5 but they would not provide it to us for this particular
6 taxpayer.
7 MR. HORTON: Did they refuse to are or they
8 just --
9 MR. ALVISO: I believe they refused.
10 MR. HORTON: -- didn't respond?
11 MR. ALVISO: I -- my understanding is they
12 refused to.
13 MS. CRAIGHTON: Mr. Chairman?
14 MR. HORTON: Yes.
15 MS. CRAIGHTON: Right now, during this next --
16 starting a couple months ago, Metro PCS was bought out
17 by T-Mobile. So, everything -- all of our paperwork
18 that we could get, everything has been stonewalled as
19 far as being able to go -- to go in and get the
20 information.
21 'Cause I don't have access to my QPAY
22 teletracker, Metro PCS or pre-cash because Metro has
23 sold that part to T-Mobile now.
24 And 'til the merger is completed, I am
25 instructed I have to wait at least 90 days.
26 MR. HORTON: Question of Appeals.
27 Uhm, given that they have refused to provide
28 the purchases, information relative to the sales tax
56
1 transaction, what's our options in order to obtain that
2 information.
3 MS. CUMINS: I don't know. I'm sorry, I don't
4 know that the option would be using what the cost of
5 goods sold on the --
6 MR. HORTON: No, in order to obtain the
7 information -- Mr. Ferris, any thoughts?
8 MR. RUNNER: Subpoena?
9 MR. FERRIS: Subpoena.
10 MR. RUNNER: Yeah.
11 MR. HORTON: Okay.
12 MR. RUNNER: Subpoena.
13 MR. HORTON: Okay. Just want to make sure that
14 we're aware of that, okay.
15 It's a little disheartening that someone won't
16 provide the Board of Equalization information,
17 particularly when it's related to a sales tax
18 transaction.
19 Do you have you a copy of that purchase
20 agreement that speaks to the inventory level? I mean,
21 the -- it's -- it's actually a -- it's a -- I forget
22 what it's called, but I think it was like a vendor
23 agreement or it's an agreement between you and -- you
24 and Metro or whoever.
25 MS. CRAIGHTON: I have given all of those to
26 the Board.
27 MR. HORTON: Do you have a copy of it?
28 MR. ALVISO: We do have copies of those
57
1 agreements.
2 MR. HORTON: Have you reviewed it?
3 MR. ALVISO: I did.
4 MR. HORTON: Any -- any mention of inventory?
5 MR. ALVISO: I did not see any mention of
6 inventory, at least that I can recall.
7 I did note that the agreement itself -- there
8 was two different ones they had provided. It -- it does
9 state the dealer's able to set their own selling
10 price --
11 MR. HORTON: Yeah.
12 MR. ALVISO: -- with regards to the phone.
13 MR. HORTON: Not my question.
14 MR. ALVISO: Okay.
15 MR. HORTON: But I appreciate the response,
16 though.
17 When you first acquired the store was their
18 inventory in the store?
19 MS. CRAIGHTON: No.
20 MR. HORTON: None whatsoever?
21 MS. CRAIGHTON: None.
22 MR. HORTON: You had to stock the entire store?
23 MS. CRAIGHTON: Yes.
24 MR. HORTON: And the Department shows that the
25 store was acquired October 1st?
26 MR. ALVISO: The seller's permit start date was
27 October 1st, 2007.
28 MR. HORTON: 2007 and the taxpayer alleges that
58
1 they started sales activities in May, okay.
2 Given that the start date is consistent with
3 the audit period start, it would seem to me that the
4 beginning inventory, assuming the testimony is correct,
5 would have been zero and the ending inventory,
6 irrespective of what it was, had to be taken under
7 consideration because that's an adjustment to purchases.
8 And, so, if we're going to use purchases and
9 not cost of goods sold, we seem to have to at least come
10 up with something for the ending inventory to provide
11 for that adjustment to purchases.
12 So then we are marking up only cost of goods
13 sold.
14 The business is closed?
15 MS. CRAIGHTON: Yes.
16 MR. HORTON: When did it close out?
17 MS. CRAIGHTON: Last year.
18 MR. HORTON: What was your ending inventory?
19 MS. CRAIGHTON: I had no inventory. I had --
20 we donated a lot of it.
21 MR. HORTON: What did you donate?
22 MS. CRAIGHTON: Car chargers -- no phones.
23 MR. HORTON: You were depleting your inventory,
24 anticipating that you're going to close out?
25 MS. CRAIGHTON: Yes.
26 MR. HORTON: On average what was your
27 inventory?
28 MS. CRAIGHTON: 25 phones.
59
1 MR. HORTON: Okay.
2 Department, what was the average sales? I mean
3 it has to be somewhat indicative of what the inventory
4 was.
5 MS. CRAIGHTON: Every time we'd sell a phone,
6 Metro would send us another one to replace it --
7 MR. HORTON: I know.
8 MS. CRAIGHTON: -- that was on that system.
9 MR. HORTON: That's why I'm asking the
10 Department. 'Cause there is a -- there's a there's --
11 there's a correlation between sales and inventory by
12 virtue of a contractual agreement to purchase.
13 MR. HANKS: While Mr. Alviso's looking for
14 that, I just thought I'd share this information with
15 you.
16 I am looking at copies of the income tax
17 returns for 2008 and 2009.
18 And what I'm looking at are the depreciation
19 schedules for both of those years. And what I'm seeing
20 is whether or not there were any accumulated
21 depreciation taken for prior years under a maker's
22 type -- type deduction calculation.
23 And I don't see one being calculated for 2007.
24 So, that would indicate to me that the Petitioner likely
25 started the business in 2008, just as she's indicating.
26 Now why we've got point of sale information
27 that -- that relates to sales occurring beforehand, I
28 can't explain that. But just in looking at these
60
1 federal income tax returns it would appear to me as
2 though the -- the business operations actually did
3 probably start in May as she's indicating.
4 MR. HORTON: Okay.
5 MR. HANKS: One of the items that's listed for
6 depreciation purposes is a vehicle. That was also
7 bought in May of 2008. And that's when depreciation
8 starts for that vehicle.
9 MR. HORTON: Okay.
10 MR. HANKS: So, I -- I think the Department
11 needs to revise our recommendation and -- and assume
12 that the sales did not take place until after that time
13 period.
14 So, I think any -- any calculations of
15 estimated taxable sales occurring before then should be
16 removed from the audit.
17 MR. HORTON: Now let's see if we can be equally
18 creative with ending inventory.
19 MR. HANKS: I agree with you.
20 MR. HORTON: Okay. Let's take -- I would
21 suggest that we take a look at the average monthly
22 sales, presuming that inventory is consistent on a
23 monthly level, back into the inventory. And that's
24 pretty safe to say that's what the inventory may have
25 been, I would guess. I can't argue the case,
26 necessarily, but I certainly would take that in
27 consideration.
28 But, at any rate, we seem to headed towards a
61
1 30-30-30.
2 Further discussion, Members? Is there a
3 motion?
4 MS. STEEL: 30-30-30.
5 MR. HORTON: Member Steel moves a 30-30-30 to
6 allow taxpayer --
7 MS. YEE: Second.
8 MR. HORTON: -- second by Member Yee.
9 Without objection, such will be the order. Thank
10 you very much for appearing before us today, there'll be
11 --
12 MR. RUNNER: You may make some --
13 MR. HORTON: -- the Appeals unit will share
14 with you exactly what 30-30-30 is.
15 Basically, you're allowed time to accumulate
16 the information that we've discussed here today. And it
17 appears that there will be an adjustment to your audited
18 taxable sales.
19 MS. CRAIGHTON: Thank you very much for your
20 time.
21 MR. HORTON: Thank you.
22 ---o0o---
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1 REPORTER'S CERTIFICATE.
2
3 State of California )
4 ) ss
5 County of Sacramento )
6
7 I, KATHLEEN SKIDGEL, Hearing Reporter for the
8 California State Board of Equalization certify that on
9 January 15, 2013 I recorded verbatim, in shorthand, to
10 the best of my ability, the proceedings in the
11 above-entitled hearing; that I transcribed the shorthand
12 writing into typewriting; and that the preceding pages 1
13 through 53 constitute a complete and accurate
14 transcription of the shorthand writing.
15
16 Dated: February 12, 2013
17
18
19 ____________________________
20 KATHLEEN SKIDGEL, CSR #9039
21 Hearing Reporter
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1 REPORTER'S CERTIFICATE
2
3 State of California )
4 ) ss
5 County of Sacramento )
6
7 I, JULI PRICE JACKSON, Hearing Reporter for the
8 California State Board of Equalization certify that on
9 JANUARY 15, 2013 I recorded verbatim, in shorthand, to
10 the best of my ability, the proceedings in the
11 above-entitled hearing; that I transcribed the shorthand
12 writing into typewriting; and that the preceding pages
13 54 through 62 constitute a complete and accurate
14 transcription of the shorthand writing.
15
16 Dated: June 3, 2013
17
18
19 ____________________________
20 JULI PRICE JACKSON
21 Hearing Reporter
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